India’s second largest IT services exporter Infosys has generated only lukewarm expectations in its run-up to the second quarter results to be declared on Friday. There is consensus that it may marginally lower the annual revenue guidance again, given the setbacks in terms of client pullback and general slowdown in customer spending.
Infosys at the end of the first quarter of FY17 had restated its annual revenue guidance to 10.5-12% in constant currency terms bringing it down from its earlier range of 11.5 to 13.5%.
Kotak Institutional Equities said, “Infosys’ guidance will be a function of the approach it follows. Up to now the approach has been to guide on the basis of the way the company sees the demand environment and does not normally include a cushion for macro-economic shocks. Whether they continue with the same approach after being forced to cut guidance for second consecutive quarter remains to be seen.”
The brokerage house felt that if Infosys continues with its historical approach then the guidance will be cut to 9-10%. The bigger worry for the Indian IT major will be its revenue growth during the second quarter, which is generally considered the strongest period in a fiscal. Any slowdown in this quarter will have a bearing on the entire fiscal.
Infosys at the end of first quarter of FY17 reported a sequential revenue growth of 2.2% in US dollar terms and the expectations are not high in the second quarter also. Brokerage house BNP Paribas expects Infosys to record 2.2% sequential increase in dollar revenue and 2.6% in constant currency terms at $2.56 billion for the second quarter.
According to Kotak Institutional Equities, it has estimated that the sequential revenue growth will be 3% in constant currency and 2.5% in US dollar terms. The EBIT margin is expected to improve by 50 basis points on normalisation of wage hikes and visa costs partly offset by cross currency headwind.
However, Infosys also faces certain broader macro-economic headwinds which has also impacted the Indian IT industry in terms of slowdown in discretionary spending by the BFSI sector and other vertical like healthcare.
“The seasonal strength that leads to strongest sequential growth in the September quarter is hardly expected to play out this time, as slowness in spending by the BFSI vertical weighs on the industry. In dollar terms, growth will be pegged back further by sharp depreciation of the pound versus the US dollar,” Motilal Oswal said in its note.
Infosys also faced certain client specific issue with Royal Bank of Scotland cancelling a large contract which impacted about 3,000 of its employees. It remains to be seen if the IT major is able to negate this loss with contracts from other clients.
Infosys under the stewardship of its CEO, Vishal Sikka has set an ambitious target of achieving a revenue of $20 billion by 2020. However, the current indications are that the company may once again close the financial year with a revenue growth of below 10%.